What is MACD?

📈 What is the MACD?

MACD stands for Moving Average Convergence/Divergence, a technical analysis tool created by Gerald Appel in 1979. It is a simple yet powerful trend indicator widely used across markets. MACD effectively signals short-term trend reversals but is less reliable for identifying overall overbought or oversold conditions.

MACD Calculation

The most common MACD setting measures the difference between a 12-day EMA and a 26-day EMA (Exponential Moving Averages). A 9-day EMA of the MACD line serves as the signal or trigger line. When the MACD line rises above its 9-day EMA, the market is considered bullish; when it falls below, the market is considered bearish.

◘ MACD Line = 12-day EMA – 26-day EMA

◘ MACD Signal Line = 9-day EMA of the MACD Line

◘ MACD Histogram = MACD Line – MACD Signal Line

Other settings can increase MACD sensitivity. For example, some analysts use (5,35,5), which means a 5-day fast EMA, a 35-day slow EMA, and a 5-day trigger line.

The MACD Histogram

The histogram offers a simple way to identify the trend. When it is above zero (positive territory), the trend is bullish; when it is below zero (negative territory), the trend is bearish.

Trading Using the MACD

The MACD consists of two moving averages with different speeds—a fast 12-day EMA and a slower 26-day EMA. When the fast moving average crosses the slow one, it often signals the start of a new trend. The most common MACD signal types are:

Signal Line Crossovers

A buy signal occurs when the MACD crosses above the 9-day signal line. A sell signal occurs when the MACD crosses below the signal line.
Centerline Crossovers

A buy signal happens when the MACD crosses above the zero line, turning positive. A sell signal occurs when it crosses below zero, turning negative.
Divergences

Divergences form when the MACD moves in the opposite direction to price action. A buy signal occurs when the MACD forms a higher low while the price forms a lower low.

Using MACD (12, 26, 9) as a Confirmation Tool

You can confirm trade entries with MACD using its default settings (12, 26, 9), focusing on three timeframes: H1, H4, and D1, where MACD tends to be more reliable.